This case describes the reorganization of drug discovery at GlaxoSmithKline (GSK) following the formation of GSK from the merger of Glaxo Wellcome and SmithKline Beecham. This reorganization placed nearly 2,000 research scientists into six centers of excellence in drug discovery (CEDD). Each CEDD focused on a small set of therapeutic areas and possessed decision rights over the progression of pharmaceutical compounds through the early stages of development. It addresses issues about the benefits of focus vs. diversification in R&D, the role of decentralized vs. coordinated decision making, and the importance of alignment between the structural and infrastructural (e.g., performance incentives) aspects of an operating model.

4. Economies …show more content…

Due to the large number of employees, swapping to a new technology resulted in extra spending. It was considered as high risk investments, since that technology might come obsolete by the time the firm acquired the necessary expertises.
This phenomenon is called “sunk cost effect”; Bayer and GSK were not incentivized to innovate. Both established firms incurred in sunk costs (costs to commit to a particular technology), and they were tending to favor the current technology.

Biotech companies instead were smaller in size with less bureaucracy and an entrepreneur spirit and as soon as the opportunity to innovate arose they displaced the “monopolist” of those big pharmaceutical companies. This is called the “Replacement effect”. The process of discovering and developing new drugs took 10-15 years and required more than $200m in “out of pocket cost”. Biotech firms entered into the pharmaceutical market because they were able to process and produce target drugs much faster.
Bayer decision was to reduce the budget in R&D and to invest in collaboration with Millennium. This results in developing 80 drugs in 18 months.

GSK incumbent to innovate was the idea of improving efficiency. Yamada innovation was made in house and not bought in (as Bayer did). His idea was to restructure the R&D process using six “centers of excellence in drug discovery (CEDD)” each focused